Pro Perspectives 9/20/23





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September 20, 2023

The Fed left rates unchanged today.  
The key takeaways were in the projections on policy and the economy made by Federal Reserve board members and Federal Reserve Bank presidents (the "Summary of Economic Projections").
As we discussed yesterday, the economy has been running at a pace three-times what the Fed was estimating in June.  
So today, they doubled their forecast, from 1% to 2.1% economic growth for 2023 (still looks too low).
Add to that, they lowered their estimate on unemployment on the year, and on core inflation (their favored inflation gauge).
So, the Fed has said we will need to see higher job losses, and below trend growth "for a period of time" to get inflation where they want it.  They've been wrong.  Inflation is going their way (lower).  And yet the job market remains tight, and growth has been hot.
On the inflation front, as we've discussed here in my daily notes, we had a growth shock in money supply, from the 2020-2021 policy response to the pandemic.  That was the inflation catalyst.
We've since had the disinflationary effect (falling inflation) from the contraction in money supply.
And now, money supply growth is normalizing.  The monthly change in money supply has been growing (modestly) for three consecutive months.   A low and stable rate of money supply growth is good for economic growth and price stability.  That's what we're getting.  And that's good! 
With that, what does the Fed really think about the economy?
In a parting comment, Jerome Powell admitted today that the government handouts from pandemic packages were "very meaningful" and have "left housholds in good shape" — still!  That's despite the headwind of increasing interest rates by 525 basis points.
And he said "people hate inflation" … "and that causes people to say the economy is terrible" in surveys … "but at the same time, they are spending money."